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Sound Energy Policy Needed to Capitalize on Latam’s Opportunities

John Padilla - IPD Latin America
Managing Director

STORY INLINE POST

Tue, 11/22/2022 - 09:21

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Q: What are the dominant global trends that have impacted your clients’ operations over the last year?

A: Oil prices are higher but the region has not been able to take advantage of this dynamic. There is more traction in places such as Brazil and Guyana but current production rates are still below initial targets. Countries simply are not able to capitalize on high prices for several reasons, not least because of the policies of different governments negatively affecting the amount of CAPEX entering countries for energy projects. As the latest example, we see significant potential downturns on the horizon for Colombia under the administration of President Gustoavo Petro given the mixed messages being sent. Moreover, gas continues to grow more volatile, a problem only exacerbated by the global repercussions of the war in Ukraine. In Mexico’s case, the amount of gas the country requires is only going to increase and become more expensive in the near term while opportunities for domestic production remain unexploited.  

With the threat of climate change, access to investment capital in oil and gas is much more restrained. The market is not giving the clear signals investors need despite the fact that we will still need oil & gas for the foreseeable future. This, combined with the 2020 crash in oil prices and subsequent post-pandemic slump, plus less-than-desirable energy policies being issued locally and internationally are a few of the reasons that have left investors disenchanted.

Q: What are some of the recurring issues your clients are facing in the Mexican market? 

A: Investors need certainty. They need to know the rules of the game to operate with a certain level of assurance. Energy policy impacts investors’ certainty significantly, and under President Andrés Manuel López Obrador, the decision not to offer new bidding rounds limits the share of the pie for investors. Pairing such finite opportunities with the rising costs of platforms, rigs, steel and other equipment, a range of increased risks, as well as permit and other related delays, weakens the appetite to invest more at this stage. What we need to do is grow the pie. 

As opposed to deepwater, which tends to be more impervious to timing, the type of contracts awarded for shallow-water projects in Mexico under the last bidding rounds favor rapid development to bring production online to optimize returns. One cannot underestimate the level of success we have seen so far, even if the discoveries to date have not been on the size and scale the industry was anticipating. The next year will therefore be crucial to determining the size of the offshore market. Without new activity, however, we will see a consolidated market, leveling off the growth achieved in recent years in the offshore sector.  

The IOCs and independents that decided to invest in Mexico did so under very different circumstances to those today. It becomes increasingly tough to justify continued activity in any given country with just one asset. Without renewed bidding rounds and opportunities for farm-outs, the ecosystem will shrink instead of fostering a more robust and dynamic industry. 

With PEMEX’s continued declining production, the need for exploration is paramount but the question of who will carry out this much-needed service for Mexico’s oil and gas remains unanswered. We must be prescient that we are operating in a financially constrained environment. Therefore, companies will be increasingly more selective as to where they deploy resources. This dynamic will present a different set of challenges for Mexico in the years to come. 

Q: As a consultancy, how has IPD sought to promote competitiveness in the Mexican oil and gas industry since entering the market in 2001?

A: We entered the market amid a wave of euphoria accompanying the election of Vicente Fox, when many in the industry believed energy reform was a done deal. When these expectations were not met, we nonetheless continued to champion the market’s opening, and we have always sought to promote transparency, since knowledge facilitates better-informed decision-making and therefore broader and sustainable investment.

Initially, over half of our work activity was for CFE’s independent power producers but that started to shift as certainty with CFE’s IPP model took hold, as well as further progress was made starting with the energy reform of 2008 including the creation of CNH. Today, all our clients throughout the value chain have assumed a more defensive mode and in general, trying to protect the assets and activities they have. Our job is to try and minimize the risks that abound, depending on where they are in the value chain. 

Q: How does IPD support the private sector in its mission to attract more investment?

A: We consistently make the case for the benefits of private-sector investment and win-win relationships. Even with the state-led programs today, there comes a point when private investment becomes essential. Under the López Obrador administration, the priority fields plan was put forward as the basis for the refortification of PEMEX. Unfortunately, these have come up significantly short of what the initial expectations were, having failed to offset the losses from Ku-Maloob-Zaap, where the gas-to-oil ratio and nitrogen levels are rapidly picking up. They may suggest even more significant declines in production soon. The bread-and-butter super shallow water production PEMEX has relied on for years is waning and the technical challenges being confronted on a range of fronts that extends well beyond upstream is only expanding. Simply put, PEMEX lacks the necessary infrastructure and know-how to handle these problems on its own and doesn’t have access to the resources to address these problems in the way it should. Additionally, market signals are not providing a pathway to invest in infrastructure globally, which will continue to dominate the discussion going forward. No one entity can handle an entire sector, which applies both to the case of PEMEX and CFE, the latter which is now investing heavily in remote community electrification, which is good.

Q: Having relocated to Colombia in 2011, what do you make of the recent election of Gustavo Petro and his promise to phase out oil and gas exploration?

There's a huge market misunderstanding on the part of the Colombian government when it comes to renewable and clean energy companies. These investors also need certainty and are highly sensitive to peso devaluations. Colombia should be highly concerned about closing off incentives for fossil fuels or any other extractive sector activity since they account for over 50 percent of all exports. Beyond not undertaking new bid rounds and looking to make fracking illegal, increasing their income tax burden will do nothing to incentivize investment. Never in the history of humanity have we attempted to switch from one energy source to another overnight. We need more energy not less of it, and we will continue to rely on fossil fuels for industrial uses for some time to come. Therefore, it must be a gradual process that takes time and politicians systematically misunderstand this aspect of the energy sector. We have two camps that are so entrenched that it is difficult to have an intelligent conversation. Energy policy must be more nuanced if we are ever to achieve net-zero carbon. Just look at how the position of the International Energy Agency’s Fatih Birol has changed in recent months. The events over the past year have only showed us we need more pragmatism and better incentives across the board. 

Given its proximity to the US, Mexico will always be in a unique position compared to other countries in Latin America, and there is still massive untapped potential here. On both the renewable power/ clean energy front and in the hydrocarbons sector, the country is barely scratching the surface. Concerns relating to rule of law and legal frameworks are front and center right now, which is only being accentuated with the USMCA disputes, and that is not going away anytime soon. What is also needed, however, is enormous infrastructure improvements, to reduce workplace accidents on oil rigs and in refineries and to improve efficiency and address ESG concerns, such as excess flaring.

 

IPD Latin America is a regionally focused consultancy that offers tailored services to both private and public entities throughout the energy sector value chain. The company leverages on-the-ground insight and analysis with a global perspective to facilitate informed decision-making.

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